Telstra’s plea to investors: hold the line

Telstra
has come out fighting after its $1 billion turnaround strategy failed to impress investors last week, asking for 18 months’ grace for the controversial plan to deliver results.

Robert Nason
, group managing director for corporate strategy and customer experience, told The Aust­ralian Financial Review: “No matter what we say now, there is no way we can satisfy [shareholders] with anything we can tell them."

As part of his three-year plan to cut costs, win back market share and “fix customer service", the former management consultant is about to take the axe to Telstra’s bloated cost base, including 6000 job cuts.

In an exclusive interview, Mr Nason promised investors – who dumped the shares last week – that Project New, the heart of Telstra’s transition strategy, would deliver a “productivity dividend" worth “hundreds of millions of dollars".

“The day we are facing today is something that Frank Blount knew was coming and that Ziggy Switkowski knew was coming," he said (both men were former Telstra CEOs).

“Eventually, competitors were going to get their act together, eventually they were going to build out networks, eventually regulation was going to work to foster a competitive environment and Telstra was going to have to become market responsive so that it couldn’t rely on its engineering and network superiority. It could and did so successfully for a while, but everyone knew what was coming.

“We’re at that point where that has arrived and we having to complete the job description that was in T1 [the telco’s first privatisation in 1997] of what Telstra was going to have to become as a company."

Mr Nason revealed that it was he who had last year approached the now-embattled Telstra chief executive
David Thodey
– a personal friend – offering his help.

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Not only had Telstra lost share to cheaper rivals but Mr Thodey was in talks to let Labor’s national broadband network replace Telstra’s fixed-line monopoly. If those talks are consummated, Telstra will surrender its massive historic advantage.

Mr Nason admits his plan will have to be tweaked if Telstra’s $11 billion deal to transfer customers to the NBN goes ahead, but says “Telstra needs a shake-up" whether or not the NBN happens.

Seen by many as a potential successor to Mr Thodey, Mr Nason said he had felt “destined" to return to the telco (in what turned out to be a specially created role with a vast remit).

Mr Nason had worked for two of Mr Thodey’s predecessors more than a decade earlier as a consultant at Coopers & Lybrand and KPMG.

“I think there were 94,000 employees when Frank [Blount] started at Telstra, there’s 40,000 now. There’s been a hell of a lot of change but this final step hadn’t been undertaken."

Mr Nason won’t comment on the number of redundancies budgeted for under Project New, stressing the direct labour is only 26 per cent of the company’s cost base.

But the looming job cuts have led to accusations that Telstra is on repeat, following 12,000 cuts in less than five years under Mr Thodey’s immediate predecessor, Sol Trujillo.

“Every Telstra CEO has used mass redundancies and promised greater efficiency and better customer service and they haven’t achieved it, so why haven’t they learned the lesson?" asked Len Cooper, national president of the Communications, Electrical and Plumbing Union’s communications division, last week.

In answer, Mr Nason insists that by reducing the cost base, the company can reinvest in service while providing a reasonable return to shareholders. He accepts, however, that it’s somewhat counter-intuitive.

“It was a difficult thing for the team to get their heads around: that you can improve service and take cost out at the same time. Often you do one and not the other.

“But online is a great example: 73 per cent of the customers we survey would prefer to deal with us online but can’t. The cost of an online transaction is less than 10 per cent of the cost a call-centre transaction.

“If you can order services, launch international roaming, change your mobile plan by simply logging in and making that change – and not having to wait in a call-centre queue and talk to an operator – there is a very big productivity dividend for us."

And yes, there will be fewer irate customers, accepts Mr Nason, who acknowledges that a culture of arrogance and entitlement towards customers still pervades significant parts of Telstra. He attributes it to the engineering culture of the Trujillo years, when Telstra focused inward as it built new mobile phone and internet networks, and had a painful but necessary IT transformation.

Trujillo’s strategy “delivered in spades", Mr Nason said, but “the brand doesn’t stand for what it used to" in terms of service, and the delayed IT revamp was still causing headaches.

By the end of this year, Telstra will have migrated most of its consumer customers onto Siebel, its new front-of-house system. But some maddening anomalies are still occurring.

“If you’re on our Siebel system, you can have the T-Hub [touch-screen computer linked to the home phone] for $35 upfront and $11 a month for 24 months," he said. “But if you’re on our legacy system, you have to pay $299 upfront. And the only answer is, ‘Oh, sorry, you’re on the wrong internal system’. When you’re serving a customer in a store, what do you do in that situation? It’s natural that the customer’s going to be very upset . . . that’s the sort of thing we’ve got to just get removed."

Telstra’s rivals are upset, too. Its strategy to price more aggressively in broadband and mobile put a big dent in the share prices of iiNet, TPG Telecom and others when it was announced in August.

“The market clearly says we are taking them on," Mr Nason said. “There’s been a free ride for those guys for a couple of years, we played a premium-price, non-compete game and we had sub-optimal service.

“Now we’ve said ‘That game’s over and we’re playing a new game’, and we’ll see where this leads but we believe that’s in the best long-term interests for investors."

They are not convinced. Telstra’s leadership fronted investors last week to explain the strategy but the shares ended Friday at $2.64 after hitting a record low of $2.62 on Thursday.

The market is worried that the dividend may have to be cut to fund the investments and is frustrated at the lack of public financial targets surrounding the plan. Mr Nason is unapologetic.

“The market is getting frustrated a little at the lack of information, but that’s a sign of how we’re going to market now . . . A sales and marketing-led company is much more careful about revealing too much of its strategy.

The results are going to be in what you deliver, and in the next three reporting periods the market will get a sense of what this is doing.Are we growing market share, are we delivering the cost savings, and what that’s doing in the marketplace."